Once the only New York-domiciled trustee of a resident trust dies and the surviving trustee is a nonresident, does the trust stop owing New York income tax on its income?

Plain-English summary

In April 2005, a grantor created irrevocable trusts, funded with cash, for the benefit of two beneficiaries. The trust agreements named two trustees: one (referred to here as S) domiciled in New York City, and the other (R) not a New York domiciliary. Because a trustee was New York-domiciled, the trusts were "resident trusts" under Tax Law § 605(b)(3), and the trusts paid New York fiduciary income tax on their income - including income earned from January 1 through July 31, 2008.

S died on August 1, 2008, leaving R as sole trustee. R remained a nonresident of New York after taking over as sole trustee. The trusts also owned no real property or tangible personal property located in New York. The petitioner asked the Department whether, given this change, the trusts now qualified as "nontaxable resident trusts" - resident trusts that Tax Law § 605(b)(3)(D) exempts from New York income tax.

The Department agreed. Tax Law § 605(b)(3)(D)(i) exempts a resident trust from New York income tax once three conditions are all met: all trustees are domiciled outside New York; the entire trust corpus, including any real and tangible property, is located outside New York; and all of the trust's income and gains are derived from sources outside New York (determined as if the trust were a nonresident trust). Because R, the sole trustee, was not a New York domiciliary, and the trusts held no New York real or tangible property, the Department found all three conditions were satisfied as of August 2, 2008 - the day after S's death. Citing its own prior opinion in the Charles B. Moss Trust matter (TSB-A-94(7)I), the Department also confirmed that with a non-domiciliary sole trustee, the trusts' income from intangible assets is not New York-source income.

The exemption is not retroactive, however. The trusts remained taxable resident trusts through August 1, 2008 (consistent with the New York fiduciary income tax they had already paid on income earned through July 31, 2008), and any income, gain, loss, deduction, tax-preference item, or ordinary income portion of a lump-sum distribution that accrued before the change in status must still be accounted for in the period of taxable residence, regardless of the trusts' accounting method. Once the change of status takes hold, the trusts remain nontaxable so long as the trustee (or trustees) stay non-domiciliaries and the other § 605(b)(3)(D)(i) conditions continue to be met.

What this means for you

Trustees and grantors of New York resident trusts

If a resident trust loses its last New York-domiciled trustee (through death, resignation, or removal) and the successor trustee(s) are all non-domiciliaries, the trust can become a nontaxable resident trust the moment that change takes effect - provided the trust also holds no real or tangible property in New York and its income is otherwise non-New York-source. The exemption applies going forward only; income the trust earned while it still had a New York-domiciled trustee remains taxable and must be accounted for separately from post-change income, regardless of the trust's accounting method.

Accountants and tax professionals

When a client's trust changes trustees mid-year, check the trustee's domicile and the location of trust assets as of the effective date of the change, and split the year's income and gains between the taxable "resident trust" period and the nontaxable "resident trust exempt under § 605(b)(3)(D)" period. This mirrors the part-year resident trust treatment referenced in Tax Law § 605(b)(6): the trust doesn't retroactively erase tax on income earned before the trustee change, but it does stop new tax exposure going forward if all three statutory conditions are satisfied and continue to be met.

Common questions

Q: Does a trust automatically stop being a "resident trust" once its New York trustee leaves?
A: No. It remains a resident trust under Tax Law § 605(b)(3), but it can become a nontaxable resident trust under § 605(b)(3)(D) if, from that point forward, all trustees are non-New York domiciliaries, the entire trust corpus (including real and tangible property) is located outside New York, and all income and gains are non-New York-source.

Q: Is the exemption retroactive to income earned earlier in the year?
A: No. Here, the trusts had already paid New York fiduciary income tax on income earned January 1 through July 31, 2008, and the Department confirmed the trusts remained taxable through the date the sole trustee became a non-domiciliary (August 1, 2008), with the exemption effective the next day.

Q: Why did the location of the trustee's domicile matter for the trusts' intangible assets?
A: Under Tax Law § 605(b)(3)(D)(ii), intangible property is treated as located in New York if any trustee is domiciled there. With a non-domiciliary sole trustee and no New York real or tangible property, the trusts' intangible assets (and the income from them) were no longer treated as located in or connected with New York.

Q: Once a trust qualifies as a nontaxable resident trust, is that status permanent?
A: No. The trust remains nontaxable only so long as it continues to satisfy all the conditions in Tax Law § 605(b)(3)(D)(i) - for example, if a New York-domiciled trustee is later appointed, or the trust acquires New York real or tangible property, the exemption would no longer apply.

Citations and references

• Tax Law § 605(b)(3) - defines a resident trust, including trusts funded by a New York domiciliary's property
• Tax Law § 605(b)(3)(D)(i) - exempts a resident trust from New York income tax when all trustees are non-domiciliaries, the entire corpus (including real and tangible property) is outside New York, and all income/gains are non-New York-source
• Tax Law § 605(b)(3)(D)(ii) - intangible property is deemed located in New York if any trustee is domiciled there
• Tax Law § 605(b)(6) - defines a part-year resident trust
• Charles B. Moss Trust, Adv Op Comm T&F, April 8, 1994, TSB-A-94(7)I - cited for the principle that a non-domiciliary sole trustee's trust income from intangible assets is not New York source income

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2010.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a10_4i.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-10(4)I
Income Tax
June 8, 2010

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I091106A

On November 6, 2009 the Department of Taxation and Finance received a Petition for Advisory
Opinion from name and address redacted. Petitioner asks whether the trusts qualify as nontaxable
resident trusts for purposes of Tax Law section 605(b)(3)(D). Because the trusts hold no real or tangible
property in New York and the trustee is not domiciled in New York, the trusts are nontaxable resident
trusts for purposes of Tax Law section 605(b)(3)(D).
Facts
In April 2005, name redacted as grantor created irrevocable trusts for the benefit of name
redacted and name redacted (the Trusts). The Trusts were funded with cash. The trust agreements
provided for two trustees: name redacted (S), a domiciliary of New York City, and name redacted (R), a
non-domiciliary of New York State. R became the sole trustee upon the death of S on August 1, 2008. R
remained a nonresident of New York State after becoming sole trustee. For the calendar year ended
December 31, 2008, the Trusts paid New York State fiduciary income tax on income earned from January
1, 2008 to July 31, 2008. The Trusts do not own any real property or tangible personal property in New
York State.
Analysis
Tax Law section 605(b)(3) defines a resident trust as follows:
•

a trust, or a portion of a trust, consisting of property transferred by will of a decedent who at
his death was domiciled in this state, or

•

a trust, or portion of a trust, consisting of the property of:
a person domiciled in this state at the time such property was transferred to the trust,
if such trust or portion of a trust was then irrevocable, or if it was then revocable and
has not subsequently become irrevocable; or
a person domiciled in this state at the time such trust, or portion of a trust, became
irrevocable, if it was revocable when such property was transferred to the trust but
has subsequently become irrevocable.

Tax Law section 605(b)(3)(D)(i) provides that a resident trust is not subject to New York State
income tax if all of the following conditions are satisfied:
(I) all the trustees are domiciled in a state other than New York; (II) the entire corpus of the trusts,
including real and tangible property, is located outside the state of New York; and (III) all income

-2-

TSB-A-10(4)I
Income Tax
June 8, 2010

and gains of the trust are derived from or connected with sources outside of the state of
New York, determined as if the trust were a non-resident trust.
For purposes of section 605(b)(3)(D)(i), intangible property shall be located in New York State if
one or more of the trustees are domiciled in the State. Tax Law section 605(b)(3)(D)(ii).
Tax Law section 605(b)(6) defines a part-year resident trust as a trust that is not a resident or
nonresident for the entire taxable year.
As admitted by Petitioner, the Trusts are resident New York trusts. The Trusts, however,
satisfied the conditions to be deemed a resident trust not subject to New York State income tax effective
August 2, 2008. On that date, their sole trustee was a non-domiciliary of New York. The Trusts owned
no real property or tangible personal property located in New York. Because the sole trustee is a nondomiciliary, trust income from intangible assets is not New York source income. Charles B. Moss Trust,
Adv Op Comm T & F, April 8, 1994, TSB-A-94(7)I. Therefore, any income the Trusts earned after they
satisfied the requirements of Tax Law section 605(b)(3)(D)(i)is not subject to New York income tax.
Once a resident trust satisfies the conditions in Tax Law section 605(b)(3)(D)(i), it is no longer
subject to further taxation by New York State so long as the trustee remains a non-domiciliary and the
trust continues to meet the other conditions in section 605(b)(3)(D)(i). The Trusts must, however, accrue
to the period of their taxable residence any income, gain, loss, deduction, items of tax preference or any
ordinary income portion of a lump sum distribution accruing prior to the Trusts’ change of tax status,
regardless of the Trusts’ method of accounting.

DATED: June 8, 2010

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel
An Advisory Opinion is issued at the request of a person or entity. It is limited to
the facts set forth therein and is binding on the Department only with respect to
the person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued
or for the specific time period at issue in the Opinion.